Tata Consultancy Services Experiences Valuation Decline Below Infosys And HCLTech In Competitive IT Sector

Tata Consultancy Services (TCS), a major player in the IT sector, has seen its equity valuation fall below that of competitors like Infosys and HCLTech. TCS now trades at a trailing price-to-earnings (P/E) ratio of 22.5X, which is less than Infosys' 22.9X and HCLTech's 25.5X. This marks a significant shift for TCS, which led industry valuations for nearly 14 years.

Previously, TCS enjoyed an average P/E multiple of 25.5X from 2011 to early this year, maintaining a premium over the industry average of 22.2X. During this period, TCS' valuation was consistently higher by 18% and 38% compared to Infosys and HCLTech, respectively. However, the company's market influence has waned significantly.

Market Capitalisation Decline

TCS' market capitalisation has dropped sharply from its peak in September last year, losing nearly 27%. In contrast, the combined market capitalisation of the top five IT firms has decreased by around 20% since December's highs. As of Wednesday, TCS' market cap stood at approximately ₹11.3 trillion.

The collective market capitalisation of these top five IT companies is about ₹26.1 trillion now, down from ₹32.67 trillion at the end of last year. This decline has resulted in a steeper drop in TCS' valuation metrics compared to its peers.

Valuation Metrics and Industry Trends

TCS' trailing P/E multiple has fallen from 32.6X at the end of September last year to 22.5X now, with a record high of 38.2X in September 2021. The average P/E multiple for the top five IT companies has also decreased from 30.4X to 23X during the same period.

According to G Chokkalingam, CEO of Equinomics Research & Advisory Services, TCS' sharper decline in market capitalisation and valuation is due to slower earnings growth compared to its peers. In recent quarters, TCS reported more significant profit growth slowdowns and margin contractions.

Profit Growth Comparison

Over the past four quarters, TCS' net profit increased by only 4.4% year-on-year, while the combined net profits of the top five IT companies grew by 6%. TCS' net profit rose to ₹50,294 crore during the trailing twelve months ending in September this year.

In comparison, the big five's combined net profit reached approximately ₹1.13 trillion from ₹10.7 trillion a year ago on a similar basis.

Future Growth Outlook

Analysts remain cautious about TCS' growth prospects for upcoming quarters due to challenging conditions in the industry environment. While management anticipates better growth for FY26 compared to FY25, analysts at Motilal Oswal Securities describe this guidance as somewhat unclear.

The IT services sector experienced a valuation contraction after a sharp rise post-pandemic; however, TCS emerged as one of the biggest losers during this selloff period.